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Building a strong edifice

We initiate coverage on Brookfield India REIT (BREIT) with a BUY rating based on March 2022 DCF based target price of Rs296/unit. BREIT is sponsored by the Brookfield Group and has 91% committed same -store occupancy and in-place rent of just Rs65/psf/month. We like the company given 9% estimated NOI CAGR over FY21-23E and with just 0.1msf of under-construction assets, the REIT offers a defensive yield play along with organic growth in its operational assets. The REIT’s low initial leverage of 0.3x net debt/equity leaves headroom for injection of new assets in the REIT portfolio. At CMP of Rs239, we estimate NDCF yield of 9.1% in FY22E and 9.5% in FY23E. Key risks to our thesis are the large-scale adoption of Work-from-Home by occupiers over the long term and rising interest rates globally.

* Quality asset portfolio in tier I office markets: BREIT’s initial portfolio of 14.0msf of leasable area includes 10.3msf of completed area, 0.1msf of under development area with balance area of 3.7msf for future development. The portfolio includes four fully integrated office parks. The portfolio is spread across four cities, namely, The Mumbai Metropolitan Region, Gurugram, Noida and Kolkata. The portfolio is stabilized with 91% Same-Store Committed Occupancy and a Weighted Average Lease Expiry (WALE) of 6.6 years. The REIT has 125 tenants with top 10 occupiers contributing 75% of gross contracted rentals. The technology (50%), financial services (18%) and consulting (18%) sectors account for majority of the REIT’s tenants.

* Healthy NOI growth CAGR of 9% over FY21-23E: We expect BREIT’s Net Operating Income (NOI) to grow at a 9% CAGR over FY21-23E based on the expected ramp up in occupancies in existing assets, annual rental escalations (4-5% annual escalation in existing contracts) and mark-up of leases which are expiring. This excludes any injection of call option/RoFo assets. The REIT has reported resilient rental collections of 99% in 9MFY21 (Apr-Dec’20) post onset of COVID-19 (in line with listed peers) and is on track to close 0.10msf of new leasing in Q4FY21. Further, the REIT is engaged in active conversations on 3.7msf of leasing prospects vs.1.4msf of overall initial portfolio vacancy.

* India’s long term advantages remain as a high-quality office hub: While COVID19 will likely impact FY22E leasing activity, our view is that the Indian office market retains many positives such as: 1) Limited number of 8-10 pan-India developers capable of building quality rental assets; 2) India remains one of the more affordable office markets in the world, with average rentals for Grade A office markets in peripheral/suburban markets hovering around 1 USD/psf/month or Rs70-75/psf/month; 3) India leads in STEM (Science, Technology, Engineering, Mathematics) talent for technology assignments with over 2 million students graduating every year

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